Op-ed: Egypt’s economic siren

The inflation resulting from the devaluation of the Egyptian currency implies an increase in prices of commodities.

BY MOHAMED A. EL-ERIAN

Newport Beach Facing a turbulent political situation and recurrent street protests, Egypt’s political elite would be well advised to focus on the economic implications of the current turmoil, whether they are in government or in opposition. Doing so would lead them to recognize seven compelling reasons why a more collaborative approach to solving Egypt’s problems is in the country’s collective interest, as well as in their own individual interests.

First, if the social and political disorder persists, Egypt’s economy will end up with crippling inflation, severe balance-of-payments problems, and a budgetary crisis. The risk of a vicious, self-reinforcing downward spiral would rise sharply.

But, rather than collapse (in the style of Asian and Latin American economies during the debt crises of old), Egypt’s economy would risk a return to stifling controls and black markets. Economic efficiency, investment, and employment would take a significant hit, while slower growth would be accompanied by higher prices, including for basic food items.

Most segments of society would be harmed, with the poor, the unemployed, and the young suffering disproportionately. With that, the legitimate objectives of the revolution that began on January 25, 2011 – inclusive growth, social justice, and human dignity – would prove even more elusive.

Second, no durable economic and financial solutions are possible without cooperatively addressing the country’s political quagmire. No matter how well intentioned and gifted, technocrats cannot ensure proper policies and deliver optimal outcomes. They need the backing of a unifying national vision, credible leadership, and citizens’ support.

Third, faced with chronic economic disorder and political instability, Egyptians increasingly lament the “hijacking” of the revolution, fueling mistrust of the country’s governing elites. Empowered by their success in ousting former President Hosni Mubarak, and then sending the country’s armed forces back to the barracks, many are readily returning to the streets to hold leaders accountable.

Fourth, repeated street protests, combined with a weak police force, fuel small pockets of criminal activity. Opportunistic thugs foment fear and chaos – real and perceived – that far exceed their number and power, amplifying the country’s general sense of malaise.

Fifth, external financial assistance cannot postpone the day of reckoning forever. Emergency support from a few friendly governments has so far limited the erosion of Egypt’s foreign-currency reserves at a time of mediocre tourism earnings and growing imports of food and other basic necessities. Facing external payments obligations, and with the currency under pressure, the government will again seek a proposed $4.8 billion loan from the International Monetary Fund and co-financing from other multilateral and bilateral sources. But securing this financing is becoming more complicated.

Sixth, the Egyptian economy’s potential, given the proper political context, should not be underestimated. Current conditions are keeping economic performance well below potential. This could be addressed promptly; while eliminating inefficiencies and re-orienting institutions that were co-opted by the old system to serve the few rather than the many would increase potential output significantly.

Finally, the country’s political leaders can learn from other countries. Egypt is not the first country to struggle in the critical revolutionary pivot from a repressive past to a better and more just future. Nor is it the first country to combine an uncertain political transition with worrisome economic and financial conditions.

It is tempting to dismiss other countries’ experiences, particularly after Egypt’s youth-led grassroots movement delivered something that no one thought possible (toppling in just 18 days a president that had ruled with an iron fist for 30 years). And some countries do indeed differ from Egypt to such an extent as to make potential lessons misleading.

There is no single transition country that offers a guiding light for Egypt. But there may be a group of four countries – South Africa, Brazil, Indonesia, and Turkey – whose combined experience is relevant and would resonate among many segments of the Egyptian population when it comes to orderly economic and political transitions.

Each of the four faced what many deemed overwhelming odds. Yet, by responding properly to their economic and political challenges, they all delivered poverty reduction, greater social justice, and expanded civil liberties.

South Africa under President Nelson Mandela illustrated the upside of channeling popular sentiment away from retribution toward national renewal. While no single Egyptian leader can credibly convey Mandela’s message of “forgive but don’t forget,” together – working collaboratively and cooperatively – they can help to shift the country’s focus from the rear-view mirror to the road ahead.

Brazil under President Luiz Inácio Lula da Silva demonstrated how basic reforms can be implemented in the context of turmoil caused by a major domestic political transition, fleeing investors, and an inhospitable global context. In 2004-2008, Brazil, which had been perennially known as the country of the future – as in “always has been and always will be” – recorded 5.5% annual average GDP growth. It reduced the proportion of citizens living in poverty from some 40% to under 25%. And it improved the 100-point Gini coefficient of income inequality by a full five points.

Finally, both Indonesia (after the Asian financial crisis of 1997) and Turkey (after its 2001 crisis) are recent examples of Muslim-majority countries that decisively overcame economic mishaps while dealing with major domestic political transitions.

The longer Egypt’s current disarray persists, the more its political elites will lose the battle for the hearts and minds of a population whose basic aspirations are summed up by four well-founded demands: bread, dignity, social justice, and democracy. But, with enlightened leadership and constructive cooperation, Egypt can overcome its current troubles.

In the past, a growing gap between what the country’s governing elites delivered and the population’s legitimate aspirations would have been addressed by imposing further repression. The new Egypt will not allow this. The empowerment of ordinary Egyptians has fundamentally changed things. Egypt’s political elites do not have unlimited time, and current economic trends are making the need to act increasingly urgent.

Mohamed A. El-Erian is CEO and co-CIO of PIMCO, and the author of When Markets Collide. This commentary is published by The Egypt Monocle in collaboration with Project Syndicate (www.project-syndicate.org)